As you may have heard, starting October 10, Carl Icahn sold 2.99 million shares of Netflix. His son Brett, who works for the old man, thought this was a mistake. So that no one felt like their voice wasn’t being heard, a filing disclosing the sale included statements by both parties, “exposing [the] disagreement” between Senior and Junior. Brett’s lays out his investment thesis. Carl’s, which reads like he addressed it to Brett and then changed it to “Dear SEC”, is essentially:
“Listen up, Sonny Boy. I know you think you’ve learned a thing or two and that’s great. But step aside, Big Daddy’s got money to make.”Read more »
It’s easy to make fun of the SEC for wanting to sue Netflix over a Facebook post. Netflix, Facebook, and the SEC are all a little funny, and bring them all together and you get a delightful orgy of hip-five-years-ago clumsiness. Also, like, olds, get over yourselves, everyone is on Facebook, why should I call Grandma on her birthday, or 8-K my operational stats? Social! 2.0!
And yet I’m a little sympathetic to the SEC here, mostly because I am old and afraid of Facebook. The agency notified Netflix yesterday that it’s planning to bring a civil action claiming that Netflix violated Reg FD by posting operational numbers – that Netflix viewing had exceeded 1 billion hours of Netflix June – on CEO Reed Hasting’s Facebook wall without press releasing or 8-King those numbers. Reg FD prohibits an issuer from “disclos[ing] any material nonpublic information regarding that issuer or its securities” to any investor or analyst without simultaneously disclosing that information through a “method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public.”
So if you’re Netflix you have two ways to win this: either the information was not material, or it was disclosed publicly in compliance with Reg FD. Perhaps strangely, Netflix is taking both angles. From its response yesterday: Read more »
Are you not bored by corporate-raider battles? Netflix just adopted a poison pill in reaction to Carl Icahn’s acquisition of 9.98% of its stock and, of course it did, what else would it do? Just once I want to see a company say “actually you’re right, we’re hopeless, let’s sell this dog, highest bidder wins, and Icahn if you can come up with the money feel free to do a tender offer to save us the trouble”? I guess it’s no surprise that no one does – if you’re an activist or raider, you only get involved in stocks that (you think) need action and/or raiding and whose managements disagree – but, still. It’s not obvious that there are two sides to every corporate strategy question, and lots of companies that end up selling start off with the traditional pill-rattling.1
There are issues of temperament here; I suppose a 10% Warren Buffett stake would elicit a different response. Normally pills are justified as protecting vulnerable, innocent, long-term shareholders from being bamboozled and coerced by evil fast-money short-term corporate raiders, but are mostly viewed as bad governance by entrenched managements, as Icahn himself quickly noted. There’s, like, one example this century2 of shareholders actually being bamboozled and coerced by corporate raiders. Conveniently, though, that example was when Icahn acquired 80% of CVR Energy and then was kind of a jerk to the remaining shareholders, which allowed lots of other boards to feel better about their own anti-Icahn poison pills.3
Anyway some things will happen and other things won’t happen and eventually Carl Icahn won’t own any NFLX shares any more and your guess about his manner and price of exit is way, way better than mine. Let’s talk about something else and dorkier here.4Read more »
If I were the sort of guy who could come in to a company, yell at them a bunch, and get them to sell themselves to someone else at a premium, I would:
do that often!, and
buy lots of call options on the stock before doing it.
Right? If I bought the call options for, I dunno, $23 an option, and they had a strike price of $36 per option, let’s say, and I bought 5 million of them, and the company eventually sold itself for like $80, then I’d be stumping up like $115 million initially and getting back $220 million for a profit of $105 million, or ~91% of my original investment, and that would be sweet. If instead I boringly bought shares at, say, $59 per share, and it eventually sold for $80, then I’d be putting down ~$295 million to get back ~$400mm for only a ~36% profit. More importantly if somehow I failed to convince this company to sell itself, or even worse if I failed to convince others to buy it, the stock might go lower – maybe really low. If the stock went to $20, I’d lose my entire $115mm option premium, but that’s better than losing $195mm if I’d gone and bought the stock.
In other words, putting a company into play increases its volatility. Options gain value with volatility. Buying an option and then making it more valuable through your own actions – going out and making volatility happen – is a good strategy. So good it’s basically magic.
So good it’s impossible! Because: what kind of idiot would sell you that option?
We struggle with how bad of a grade to give ourselves for 2011 because in some ways it’s too early to tell. Yes, many of our stocks took beatings during the year, but only time will tell whether we were wrong or just early. We think in most cases the latter, given that we still own meaningful positions in 8 of our 10 (and 15 of our 20) biggest losers on the longside in 2011. If even a handful of these stocks perform like we think they will in the next 1-3 years, we won’t look as dumb as we do today– and thus we might give ourselves a C for 2011. If these stocks don’t recover then we deserve a D. Why not an F? Because an F is reserved for blowing up- and we didn’t…We feel badly about our recent performance and obviously wish we’d done many things differently, but we are not at all discouraged, as we’ve been through this before. If you look at our performance table at the beginning of this letter, you will see that we’ve lost more money, much faster, on two other occasions: we were down 27.4% in eight months from June 2002 – January 2003, and down 32.8% in five months from October 2008 – February 2009. In both of these cases, by playing a strong hand and buying more of our favorite stocks as they plunged, we made back all of the losses (and then some) remarkably quickly: in only nine months in 2002-03 and a mere seven months in 2008-09. We could not be more confident that we will rebound strongly from our latest losses [-24.9 percent for 2011] as well.Read more »
If you run an investment bank, which basically takes a cut of economic prosperity, it’s good to have a backup plan for when there’s not so much prosperity. So you try to build some countercyclical businesses. In boom times you lend lots of money to people to let them buy McMansions. In crises you make lots of money on widening bid/ask spreads and volatility. In recessions you, I don’t know, get free money from the Fed and hunker down and ZIRP and buy gold! That’s the theory. Sometimes it doesn’t work.
Now of course that theory is not equally good for everyone in all of those businesses. The ranks of cupcake bakers and artisanal dog walkers these days are filled with former MBS structurers. Guys who set up distressed commercial real estate funds in 2009 were often shut out of the market by the time they’d raised money.
The smart move is to be in a business that makes money in boom and bust. Some whole firms look like that. Places like Lazard and Greenhill are basically in two businesses, M&A and bankruptcy, and bankers who can do both well are relatively insulated, stitching together big levered deals in the good times and selling off the bits when they go bankrupt. I worked in a group that did both equity-linked issuance and stock buybacks. Buybacks tend to be done when companies are flush with cash and investment opportunities are limited; equity-linked securities often come from companies that are a bit down on their luck but still have ways to put money to work. So you’ve gotten long some economic volatility, and you’ve got both peaks and troughs covered.
But, of course, if someone is making money both ways, then someone is losing it both ways. Companies build empires at expensive prices and divest them cheaply, paying transaction costs both ways. And boy do they ever sell stock low and buy it high. Still, it is rare to see an illustration of that quite as breathtakingly perfect as Netflix’s announcement yesterday that it was issuing $400 million of equity and convertible bonds, after spending most of the last year and a half buying back stock. Now, first of all: Read more »
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